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Texas Considers Options for Reducing Property Taxes

5 min readBy: Janelle Fritts, Jared Walczak

The Texas legislature is considering two pieces of legislation (Senate Bill 2 and Senate Joint Resolution 76) which are aimed at reducing local property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. burdens. SB 2 would cap property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. levy increases at 2.5 percent, while SJR 76 aims to mitigate property taxes by shifting part of the burden to sales taxes instead. Leaders are likely considering this tax swap in addition to the cap as a strategy to address voters’ complaints about property taxes.

We can break down property tax limitations into three main categories: assessment limits, rate limits, and levy limits. SB 2 is a levy limit, which means it limits how much revenue the school district can collect to an annual growth factor of 2.5 percent (down from a current cap of 8 percent). If a district wishes to impose property taxes at a rate which would bring in collections more than 2.5 percent higher than the previous year’s collections, the decision automatically passes to the public through a tax ratification election. Levy limits constrain the total revenue a government entity can bring in, but still allow individual taxpayers’ burdens to rise if their property values increase faster than those of surrounding properties.

Forty-six states, including Texas, have passed some form of property tax limitation; Texas is one of nine states which already implement all three categories. Texas’s assessment limits control how much a property’s assessed value can change from year to year. That kind of limit protects certain taxpayers but causes large distortions in tax rates between otherwise similar properties based on date of construction (or improvement) or sale. Texas’s rate limit, which is the most straightforward category of property tax limitation, limits the tax to $8 for every $1,000 of property on a municipal and county level. School districts are limited to $10.40, or 66.67 percent of the previous year’s rate plus 0.4 mills if the previous rate was lower than 15 mills.

SJR 76 proposes a tax swap via a constitutional amendment, under which the state would reduce property tax payments by increasing the sales and use tax. It caps the state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. at 6.25 percent for general fund purposes, with any portion of the rate in excess of 6.25 percent dedicated to education with a property tax offset.

A tax swap from one level of government to another—and one category of taxes to another—is often logistically challenging. The amendment itself leaves the mechanics up to the legislature, so we do not yet know how revenue would be distributed, or how a property tax reduction would be assured. Although SB 2 would impose a statutory constraint on local governments’ ability to raise rates back to their former levels without voter approval, some jurisdictions might seek to restore property taxes to something approaching their former level even with the new state-supplied revenue. Even if those rates don’t reach past levels, the increase would mean that residents are ultimately paying more in combined state and local taxes than they were.

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The resolution doesn’t address how it’s divvying up the funds raised by the sales tax. Would revenue sharing be based on past property tax collections, population, the location where the sales taxes are collected, or some other formula? Under some methods, districts which previously imposed higher rates would be rewarded; under any conceivable method, impacts will vary from district to district.

Furthermore, SJR 76 does not specify what part of the property tax it’s replacing. The joint resolution states that the amendment is meant to “reduce school district ad valorem rates through an increase in the state sales and use tax.” This could apply to the Maintenance and Operation (M&O) portion of the property tax, which is a locally-collected, mandatory 15 mills tax for the maintenance and operations of local schools—a portion of which is redistributed from wealthier to less wealthy school districts by the state—but the amendment itself does not spell this out.

Property taxes tend to be more economically neutral than most other taxes, since they don’t discourage labor and investment the way income and many other forms of taxes do. Because real property is immobile, tax avoidance and competition are much less pronounced with property taxes, making them a relatively stable and economically efficient source of local revenue. While the system is not perfect, property taxes also get closer to providing benefits relatively in line with the amount of taxes paid.

Because Texas forgoes an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , it relies more heavily on other sources of revenue, and local governments are comparatively more important than they are in many other states. This yields property taxes that are higher than average, a frequent source of complaints in a generally low-tax state, even if they are part of the reason other taxes are low.

Sales taxes, so long as they are levied on final consumption, also tend to be relatively economically neutral. They’re also relatively transparent: you can see how much you’re paying in taxes just by looking at your receipts. But property taxes are likely more transparent in terms of total taxes paid. Anyone could tell you her property tax bill from this year, but you’d be hard-pressed to find someone who could tell you how much she paid in sales taxes over the same stretch of time.

Senate Bill 2’s levy limit would control the total revenue gathered through property taxes by automatically putting levy increases exceeding 2.5 percent to a vote. Senate Joint Resolution 76 would put sales tax increases toward property tax relief but would not guarantee that local taxes would remain at lower levels after their initial drop, and the distribution of offsetting revenues across districts would remain unknown. Both pieces of legislation are well-intentioned, but the tax swap, in particular, is highly complex. The Lone Star state should make sure to consider all the consequences when considering these policies.